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As Doctors Trade Shingle For Marquee, Cries of Woe

It has been 22 years since a young pediatrician named Earl R. Washburn 3d hung his shingle in this rustic old gold-mining town in the foothills of the Sierras. There were no pediatricians in Placerville back then; with fewer than 7,000 people, there was not even a McDonald's.

But the town, with its towering pines and firs, charming turn-of-the-century cottages and proximity to the state capital, Sacramento, seemed a fine place to set up practice and raise a family. And Dr. Washburn, fresh out of residency with a wife and 15-month-old son, had very definite ideas on how to do both.

Antibiotics would not be casually prescribed, especially not to infants. Immunizations were essential; parents who opposed vaccination could find another doctor. Prospective partners -- there are now four partners and one associate in the El Dorado Pediatrics Medical Group -- were told they would not get rich, but neither would they miss their children's soccer games.

The goal, says Dr. Jeffrey Rabinovitz, who joined Dr. Washburn in 1977, was this: ''You take care of your patients, and your family.''

Last year, 92 percent of the nation's physicians had some type of managed-care contract, according to the American Medical Association. ''Capitated'' contracts, which pay a set fee for each patient, accounted for one-third of the average doctor's salary. Five years earlier, capitation was barely a blip on the medical association's radar screen, so negligible that the organization did not bother keeping tabs on it.

As the free market has achieved what President Clinton's ill-fated health-care overhaul proposal could not -- increased efficiency and lower costs -- doctors have learned to cope with burdensome paperwork, discounted fees and insurance company restrictions on the specialists they refer to and the drugs they prescribe.

But what troubles them most, it seems, are the intangibles that have been lost, the cherished traditions that Dr. Washburn and his colleagues still dream of fulfilling: building their own practice on their own terms; forging a bond with patients that lasts through the years, no matter which insurance company pays the bills.

''Compare the Marcus Welby type of doctor that existed up until 10 years ago,'' said Dr. Alan Hillman, director of the Center for Health Policy at the University of Pennsylvania, ''where a doctor owns his or her own practice, sets his or her own rates, practices his or her own style of medicine. Now you have doctors subject to outside management, most doctors being employees of an organization or highly managed. The loss of autonomy and control is astounding. The doctors are battered.''

Battered is precisely how Dr. Washburn and his colleagues in Placerville feel. Like doctors across the nation, they have been swept up in a roiling wave of medical mergers and acquisitions. Physicians who once had 2 partners now have 200. Others have sold their practices outright, trading patient charts for cash payments and employee status at hospitals, H.M.O.'s or ''physician practice management'' firms. In 1997, the medical association reports, 43 percent of the nation's physicians -- excluding those in training, Federal employees and those who did not see patients -- worked for someone else, up from 24 percent in 1983.

While the buying and selling frenzy appears to finally be abating, perhaps nowhere has it been as furious as in the region surrounding Sacramento. Known as the managed-care capital of America because 90 percent of all insured people are enrolled in health maintenance organizations, California's capital city is ''the chaotic extreme of a generally turbulent marketplace,'' said Dr. James C. Robinson, a professor of health economics at the University of California at Berkeley.

That turbulence nearly put El Dorado Pediatrics out of business. In the last two years, Dr. Washburn and his partners have watched as big medical groups have gobbled up smaller practices like their own, and then dismissed some doctors while keeping their patients. Resisting offers to sell, they nonetheless affiliated their practice with one such company, only to watch it drown in red ink. When that firm was sold, Dr. Washburn said, the new owner, FPA Medical Management Inc., stopped payment for patient visits. After five months, the pediatricians were owed $86,000.

''We were desperate,'' he said, ''down to our last 58 cents.'' The dispute was eventually settled, but now Dr. Washburn's group has a new worry: FPA, which administers the Placerville pediatricians' largest health care contract, accounting for a third of their patients, filed for bankruptcy on July 19.

''It's like some science fiction story, a parallel universe,'' Dr. Washburn said, ''where they keep switching you from one universe to the next with a new set of rules. In about the time you figure out how to make the universe work, it changes again.''

The tumult has taken its toll. With doctors losing jobs and patients, there is intense competition for work. Collegiality is all but gone, said Bill Sandberg, executive director of the Sacramento-El Dorado Medical Society. ''It's been a bloody war,'' he said. ''All we have had is unpredictability, chaos and crisis.''

Amid the chaos, medicine's elite have learned an ego-bruising lesson: They could not count on their patients. Given a choice between loyalty to a longtime doctor and cheaper medical care, the patient will choose to pay less. Dr. Washburn, the pediatrician, has seen this from both sides; he is recovering from colorectal cancer, and recently switched primary care physicians because his doctor left his health plan.

Managed care, he said, worked wonderfully for him; he never even saw a bill, and estimated that he paid no more than $100 for $250,000 worth of medical care. ''But,'' he added, ''everybody who took care of me lost money on me.''

The Practice

Four Doctors Cling To Independence

The hilly two-lane road that leads to the El Dorado Pediatrics Medical Group stretches south from California's Route 50, past a string of auto body shops, the local fruit growers association and a church. Dr. Washburn and his colleagues work out of a low-slung stucco building the color of caramel, tucked unobtrusively behind a split-rail fence.

Inside, the office is old-fashioned, with hand-painted murals in each examining room that feature barnyard scenes and grassy fields of blue lupine, astronauts and even an Egyptian tableau. Dr. Washburn is a tall, slender 51-year-old with big square glasses, a soft-spoken man who reads philosophy in his spare time.

The story of the Placerville pediatricians' foray into the high-stakes world of mergers and managed care is a tale of miscalculations and dashed hopes. It began in 1993, when Foundation Health Corporation, then the second-largest health maintenance organization in Sacramento, decided to create a separate practice management company so that it could funnel its own patients to its own doctors.

The new company quickly bought the practices of 100 Northern California doctors, most of them primary care physicians, said Kurt Davis, a former Foundation Health vice president. At the same time, it invested millions in building a dozen state-of-the-art clinics, including one in Placerville measuring 25,000 square feet and with enough space for 12 doctors. ''We dove in full blast,'' Mr. Davis said. Dr. Washburn, meanwhile, gave the new clinic a nickname: ''the Taj Mahal.''

El Dorado Pediatrics was courted heavily by the new group. At a time when the price of a doctor's practice was plummeting, Dr. Washburn said, he and his colleagues were offered ''a generous buyout,'' along with salaries of nearly twice what they were earning and a three-year guarantee that they would not be dismissed.

To Dr. Washburn, it sounded promising. He is not, by his own account, a wealthy man. He bought a new Subaru this spring, a step up from his old 1990 Ford Taurus, and said he has never made more than $100,000 a year; the American doctor on average now makes $200,000 a year, according to the American Medical Association. At the same time, Dr. Washburn was cautious.

''I'd be delighted to make more money,'' he said. ''There's always things to spend it on. But in this practice we are very careful about balancing our social and personal needs with the needs of making money.''

That means that when a doctor needs time off, as Dr. Washburn did during his cancer treatment, the others pitch in without complaint. And it means they practice as they see fit. When a mother who lacked insurance brought her son in for a sprained thumb on a recent day, Dr. Rabinovitz waived the fee. When that same day Dr. Washburn evaluated a high school boy for attention deficit disorder, he patiently questioned the boy for 60 minutes. ''If we need an hour,'' said Dr. Ulrich Hacker, another partner, ''we take an hour.''

A for-profit company, the group worried, would undoubtedly interfere with that freedom. But when it came to a vote, they split down the middle. Drs. Washburn and Hacker wanted to stay. Dr. Rabinovitz and Dr. Linda Eldred, the fourth partner, wanted to go. In the end, they decided to decline rather than split up.

What they wound up with seemed even better: a lucrative five-year contract in which they became Foundation Health's first and only ''associate medical practice.'' The agreement called for El Dorado Pediatrics to see as many patients as Foundation could provide, a risky proposition, since doctors do not like to depend too heavily on one health plan. In return, Foundation would pay the doctors 100 percent of what they billed.

In this era of heavily discounted medicine, such an arrangement was unheard of. But Placerville had just one other pediatrician, and he was fresh out of training. Foundation needed El Dorado Pediatrics. ''We were in hog heaven,'' Dr. Washburn said.

The Corporation

A Deal Too Good To Be True, Was

The euphoria did not last. Before long, the Foundation medical group was ''losing just tons of money,'' said Mr. Davis, the former company spokesman. The fancy clinics were expensive to run, the doctors were not seeing enough patients to cover the overhead, and health insurance premiums were in a nose dive. ''We didn't read the tea leaves right,'' Mr. Davis admitted.

By early 1996, 26 Foundation doctors had been laid off, losing their patients as well as their jobs. While Dr. Washburn and his colleagues were counting their blessings that they had not sold to Foundation -- ''one or two of us would have surely been fired,'' Dr. Rabinovitz said, in retrospect -- they were owed money by the sinking firm. Meanwhile, some of the laid-off doctors went to Mr. Sandberg, the medical society executive, for help finding work.

''Some were totally devastated,'' Mr. Sandberg said. ''Some of them were crying.''

But Dr. Robinson, the health care economist at Berkeley, has little sympathy for the out-of-work doctors. ''Don't think of these doctors as poor oppressed proletarians,'' he said. ''These doctors that sell get rich selling.''

The white knight that rescued -- or appeared to rescue -- Foundation was FPA Medical Management Inc., a company based in San Diego that until recently was one of the nation's biggest physician practice management firms. FPA had been snapping up medical practices across the nation. With 7,900 doctors in 29 states at its peak, it acted as a middleman between doctors and health plans, negotiating contracts and administering claims. A publicly held company, it was making a big splash on Wall Street.

In October 1996, FPA paid $220 million for the Foundation doctors' group, and leased the half-empty medical centers. But when Dr. Washburn attended a meeting where a Foundation executive described the sale, he felt a little queasy. ''He kept saying, 'We have to take care of our shareholders,' '' the pediatrician said. ''What about the patients?''

The takeover was rocky. Doctors did not like doing business with FPA; in Tucson, Ariz., a group of FPA-owned doctors formed a union last year to fight the company's cost-cutting measures, like increasing patient loads and dismissing specialists. In Sacramento, some quit amid complaints that they were not paid on time.

But the Placerville pediatricians could not leave. They were not employees. When FPA took over the contract, Dr. Washburn said, he spent five months trying to collect on the $86,000 that was owed. In an interview in May, Dr. Stephen J. Dresnick, FPA's president and chief executive, attributed the dispute, which was eventually resolved, to ''a mismatch of expectations.'' In any event, the FPA executive said, the amount was negligible.

''Eighty-six thousand doesn't sound like a lot of money, does it?'' Dr. Dresnick said, noting the practice has five doctors. ''You're looking at $16,000 per person. That doesn't strike me as an extraordinarily high number of outstanding claims.''

The pediatricians take a different view. They gave up six weeks' salary to make up for the deficit. ''To him it's chump change,'' Dr. Washburn said. ''To us, it's the world. This was our No. 1 contract. It was one-third of our income, and we were dying.''

Each Wednesday afternoon, the five doctors of El Dorado Pediatrics Medical Group gather around some folding tables for a two-hour brown-bag lunch and business meeting. The talk runs the gamut, from medical journal articles to bookkeeping matters. In recent months, it has centered largely on FPA.

At one point, before it became clear that the company was headed for bankruptcy, Dr. Rabinovitz threw out an idea. Perhaps, he suggested, the group should send a letter to its patients, informing them that its contract with FPA was due to expire in 1999, and that the doctors did not plan to renew it. ''What I'm saying,'' he told his partners that spring day, ''is we cut our losses. We put ourselves in a position where we could afford to lose this contract.''

Everyone around the table knew that such a letter could cut both ways. Patients might try to switch health insurance plans to stick with the doctors. Then again, as Dr. Rabinovitz himself acknowledged, they might not. ''I'm a firm believer that we always overestimate patient loyalty,'' he said.

Today, that dilemma is moot. On July 15, the California Department of Corporations issued a cease and desist order to FPA, ordering the company to pay its doctors; the bankruptcy petition was filed four days later.

While state officials scurried to make certain that patient care was uninterrupted, Dr. Jack Lewin, the director of the California Medical Association, began tallying the losses. He estimated that FPA owed $60 million to California doctors. Some of those physicians, Dr. Lewin said, traded their practices for FPA stock, which hit a high of $40 a share last October but was trading at 25 cents by July 30. ''Those doctors lost their shirts,'' he said.

Analysts say FPA tried to grow too big too fast. Dr. Dresnick, the FPA executive, vows that the company will emerge, healthy and revitalized, from its reorganization by the end of the year. But it is pulling out of Sacramento, he said in a recent interview. While the FPA-employed doctors there are busy affiliating themselves with new groups, the company is laying plans to dispose of the expensive clinics, including the half-vacant one in Placerville.

''It was losing money every month,'' Dr. Dresnick said, ''and so the decision was, do we put more money into it, or just admit that this was one we couldn't make work?''

The Future

White Knights Of the Apocalypse

For the pediatricians, that decision is somewhat of a relief. FPA still owes them $24,000, and they are continuing to see patients without being paid for their work. ''We assume, if they filed for bankruptcy, that they are out of our lives,'' Dr. Rabinovitz said. ''But the question is, who is going to pay us? We will probably have to stand in line at the bankruptcy hearings.''

In the meantime, the doctors will continue to work longer hours, a practice they began when Dr. Washburn became ill, in an effort to bring in more income. They are trying to persuade patients to switch their insurance to plans not administered by FPA health plans. And they are looking to sign more managed-care contracts, in an effort to diversify.

Although they have entertained other offers to sell during the past two years, it no longer seems like a viable option. Companies like FPA have come to realize that buying a medical practice may not be such a good investment; health economists say doctors tend to work harder when they are self-employed. In any event, the pediatricians say, they no longer believe they have to join a larger group to survive.

''At this point,'' Dr. Washburn said, ''we are not looking to anybody to come in and be the white knight to protect us or save us. We are simply going to have to do whatever we do on our own.''

Dr. Robinson, the Berkeley health care economist, said he believed that out of all this churning would come something good. Perhaps not universal health care for all Americans, as President Clinton once envisioned, but at least a system that is cost-efficient.

''We are re-engineering the health care system,'' he said, ''and we are doing it the American way, which means incredible competition. We're going to have a consumer-oriented system, not a doctor-oriented system.'' The change, he added, will continue to be painful for doctors. ''We are seeing supply and demand equilibrate here at a new lower price, and it is nasty.''

In Placerville, Dr. Washburn sees something else in the future of American health care: complete collapse. He believes President Clinton squandered an opportunity to make lasting change, that the time is past when things can be ''fixed in an orderly fashion,'' and that any system in which a crucial component is so demoralized -- namely, doctors -- cannot possibly survive.

Lately, Dr. Washburn has been writing philosophical articles for medical trade magazines. He has just picked the title for his next one: ''The Coming Medical Apocalypse.''

After the Revolution

This series will look at the effects of changes in the nation's health care system. Future articles will examine efforts to help the uninsured, and the problems of managed care.